Economic Outlook - September 2007

State recruiting efforts get a dose of court aid

The legal climate for business in North Carolina is better than you might think — better than in all but five states, says The American Justice Partnership, a Lansing, Mich.-based lobbying group formed in 2005 by the National Association of Manufacturers. That should help North Carolina recruit businesses, but finishing behind neighboring Virginia won’t. Steven B. Hantler is chairman of the nonprofit and assistant general counsel for Auburn Hills, Mich.-based Chrysler LLC.

BNC: How could you rank North Carolina behind Virginia? That might cost it a factory or two.

Hantler: North Carolina came out with the sixth-best number. Virginia had the second-best. Two and six isn’t a big difference. I don’t see North Carolina losing jobs as a result.

What’s so great about the states that ranked higher than North Carolina?

Insurance-loss ratio was an important factor. It’s losses divided by the premiums earned. North Carolina had the seventh-lowest.

Is the legal environment really more dangerous or unpredictable than before?

Far more. Every year, we see litigation costs going up. Direct costs — including settlements, judgments and legal fees — have gone up in the last 10 years from probably $150 billion to nearly $300 billion. That doesn’t include indirect costs such as loss to shareholders and loss of opportunity for sales.

The Justice Department says tort trials concluded in U.S. district courts declined by nearly 80% between 1985 and 2003.

Most lawsuits are filed in state, not federal, court, but I wouldn’t be surprised if the number of lawsuits in state courts has stayed the same or gone down. The problem is, we have far more class actions filed, and one class action involving 3 million plaintiffs is not the same as a slip-and-fall with one plaintiff.

Which businesses are most vulnerable?

Those that are making a lot of money. The trial bar smells the cash in the water and swims to it very quickly.

Your overall ranking is an average of three indices — one you developed and two others. Why?

I don’t know that mine is the best of the three. It’s not an exact science. I think the truth lies somewhere between the three. I was asked by Directorship magazine to create this for its readers. We have board directors and CEOs all across America asking for guidance in making boardroom decisions on where to make their investments, where to close fac-tories, where to open factories. And they’ve made it clear: A state’s legal climate is a factor that they’re considering.

If the difference between second and sixth isn’t significant, what is?

If everything else is equal, basically the top 15 to 18 are states that I would counsel a member of a board of directors to favor. Avoid anything from about 35 down.

South Carolina ranks 36th.

The governor is very supportive of tort reform, but the legislature has not done enough. Its liability climate would not induce businesses to make investments there .

Your report says North Carolina lawyers are pushing to roll back reforms.

It didn’t affect North Carolina being No. 6, but that ranking comes with a caution. If all other things are equal, and someone had a choice between No. 8 Indiana and No. 6 North Carolina, I’d say your best bet might be Indiana.

You say North Carolina’s business court is a model. Why?

It is an excellent way to resolve business disputes, with judges who understand the issues before them, who don’t have to get educated or guess. It is a sophisticated approach that should be adopted in other states. Decisions get made timely, they get made predictably, and they get made fairly.

Some businesses deserve to be sued, so how do you strike the right balance?

If someone is injured by another party’s wrongful conduct, they should receive full compensation quickly. Our courts, in too many jurisdictions, go beyond compensation. They go to jackpot justice or a litigation lottery. Legal reform is not about taking away anyone’s right to sue. It’s about insuring a system that’s fair and balanced for consumers and manufacturers. Award fair compensation timely, fairly and predictably. It’s not doing that.

Why is West Virginia ranked lowest?

Do you have two hours?

About 20 seconds.

It has a very activist Supreme Court majority. It creates new causes of action that aren’t recognized in other states. It will affirm out-rageous judgments that are unfair, unpredictable and go beyond due process. It has a state attorney general who is highly activist, who is, I think, usurping the legislative function by trying to obtain regulation through the litigation process.

North Carolina ranked pretty high, so it can relax, right?

Its tort system is probably not transferring compensation cost-effectively. That’s true in every state. A Pacific Research Institute study showed that for every dollar spent on the legal system only 22 cents go to injured parties. Well, if our goal is to help compensate injured parties, we’ve got to change that equation so that injured parties get a higher percentage of the dollars that flow into the system.